Exchange-traded funds offer a convenient way into the diverse and enticing biotech industry. But even when they cover the same industry, ETFs can differ wildly. Let's take a closer look at two biotech ETFs, and see which looks like a better bet for investors now.
Short and strong
The First Trust NYSE Arca Biotech (FBT) has a lot of promise, with a short but strong track record. It fell less than half as much as the S&P 500 did in the market-meltdown year of 2008, while handily beating the market both in 2009 and so far this year. At 0.60%, the expense ratio is a bit high for ETFs, but not completely unreasonable. With a concentrated portfolio of around 20 stocks, three-quarters of which are mid- or small-caps, the ETF has lots of room to grow quickly.
Still, there are some drawbacks to this ETF. For starters, it's tiny, with just $167 million or so in assets, making it extra-vulnerable in rocky times. Moreover, its concentration, while heightening potential gains, also increases risk.
Just take a look at three of the stocks it owns: InterMune (Nasdaq: ITMN), Genzyme (Nasdaq: GENZ), and Dendreon (Nasdaq: DNDN). Genzyme is the subject of a hostile bid by Sanofi-Aventis (NYSE: SNY), which has boosted the share price. If the deal falls through, the shares may return to previous lower levels. InterMune fell nearly 80% in May after the FDA rejected its lung-disease drug, and the stock still fetches just a third of what it did before the decision. And despite excitement about Dendreon's prostate-cancer drug Provenge, it's very pricey, with potential competitors on the horizon.
Bigger and… better?
Given those cautions, the iShares Nasdaq Biotechnology ETF (Nasdaq: IBB) gives investors a broader selection of more than 125 stocks. But again, this scope can be somewhat deceiving. Amgen (Nasdaq: AMGN) makes up close to 9% of the fund, although it's arguably one of the least volatile stocks in the entire sector. On the other hand, this fund also owns small companies such as Incyte (Nasdaq: INCY), whose lead cancer drug is currently in Phase III trials for myelofibrosis and has posted promising results in early trials.
In addition, the iShares ETF is bigger, with $1.5 billion in assets, and less expensive with an annual expense ratio of 0.48%. It has turned in hit-or-miss returns in recent years, but overall, it's beaten the market handily over the past three and five years.
Why biotech?
ETFs take away much of the stress of picking successful stocks. Biotechnology is a critical field with lots of profit potential, but with roughly 200 publicly traded biotech companies, it's hard to figure out which ones will likely fare best over time.
Both ETFs look good to me. But if I had to pick, the iShares one seems a bit less risky, and a better value.
While you choose which stocks are right for you, get rid of the wrong ones. Dan Caplinger tells you which stocks to keep out of your IRA.
